Alliance university (AIOU) - Case Study - TOYOTA AUSTRALIA IN PERIL

 

 

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Case Study

 

TOYOTA AUSTRALIA IN PERIL

 

On Wednesday, December 11, 2013, General Motors Holden (Holden) announced its plan to exit car manufacturing in Australia by the end of 2017.

 

Immediately after the exit announcement by Holden, Toyota expressed its fear that it was in peril:

 

This will place unprecedented pressure on the local supplier network and our ability to build cars in Australia. We will now work with our suppliers, key stakeholders and the government to determine our next steps and whether we can continue operating as the sole vehicle manufacturer in Australia. We will continue with our transformation journey as planned.

 

Other stakeholders in the automotive industry also expressed similar fears. Apprehensive of Toyota’s ability to continue manufacturing, the Australian Manufacturing Workers Union (AMWU) national vehicles division secretary, Dave Smith, said, “It’s now highly likely that Toyota will leave Australia. In fact it’s almost certain.”

 

Why did Toyota fear that Holden’s exit would put unprecedented pressure on the local suppliers? How was Holden’s exit related to Toyota’s ability to build cars? Why were observers contemplating an exit by Toyota, the best-selling and most trusted brand in Australia, especially when it had been planning to continue its transformation journey? What had gone wrong with the company that had such a glorious long history of production? Should Toyota stop manufacturing in Australia?

 

 

TOYOTA AUSTRALIA: A GLORIOUS LONG HISTORY OF PRODUCTION5

 

Toyota Australia (Toyota; see Exhibit 1), a subsidiary of Toyota Motor Corporation Japan, was founded in 1958 in Port Melbourne, Victoria, Australia. It started assembling vehicles in Australia in 1963 in the Melbourne factory of Australian Motor Industries. The first Toyota model assembled in Australia was the Tiara. Between 1964 and 1968, Toyota began assembling three more models —the Corona, the Crown and the Corolla. At its new Altona plant in Melbourne, it started producing engines in 1978, and car body panels in 1981. In 1986, for the first time, Toyota started exporting. In 1987, Toyota began the local

manufacture of the Camry, which replaced the Corona, at the Melbourne plant. In 1988, Toyota’s local operations were unified to form Toyota Motor Corporation Australia.

 

In 1994/95, Toyota stopped manufacturing in its Port Melbourne plant and shifted all its operation to its Altona plant in Melbourne. The Corolla was the first model to be built there. As a strategic shift, in 1996, Toyota expanded its reach to foreign markets by exporting the Camry to the Middle East, where it became the area’s number-one selling car. From the Altona plant, Toyota also started producing the Avalon model in 2000. Its journey with innovative products continued in the subsequent period. In 2010, it released the Camry hybrid, the first hybrid car manufactured in Australia. It launched the New Generation Camry Model in 2011.

 

Toyota emerged as the market leader in Australia for the first time in 1991. It registered record sales of more than 186,000 cars in 2003 and remained the overall market leader for the subsequent 11 years (see Exhibit 2 and Exhibit 3). The company also registered a huge success in the export market, and emerged as the leader in this segment. It exported almost two-thirds of its production (see Exhibit 4) from the Altona plant to 13 countries worldwide. In 2011, Toyota Australia, the country’s biggest automotive exporter, exported nearly 60,000 units worth $1.004 billion6 (including parts and accessories).

 

As per a poll conducted by Readers’ Digest Australia in 2013, Toyota was the most trusted automotive brand in Australia. A balanced business model and innovative quality products were the keys to Toyota’s past success and had helped to build its brand.

 

 

BUSINESS MODEL

 

Toyota Australia followed a balanced business model (see Exhibit 5), which included a three-pronged strategy  of  manufacturing  vehicles  domestically,  exporting  some  of  its  domestically  manufactured vehicles and importing some components from cheaper sources.

 

In the domestic manufacturing process, Toyota followed the “just in time” approach to production, which allowed the entire production process to be regulated by the natural laws of supply and demand. Customer demand stimulated production of a vehicle, which, in turn, stimulated production and delivery of the necessary parts. The just in time approach resulted in the right parts and materials manufactured and provided in the exact amount and place where they were needed. Along with the just in time approach, Toyota   also   followed   “Kaizen,”    the   practice   represented   by   employees   making   day-to-day improvements in their working practices and equipment. “Jidoka,” automation with a human touch, was another process adopted by Toyota. Such approaches to the domestic manufacturing process strengthened Toyota’s brand image by contributing to Australian society in terms of value-addition and employment, and good quality products, and supported its position as the market leader.

 

However, Australia’s domestic market for cars was very thin. To overcome the constraint imposed by domestic demand, Toyota pursued an export-oriented strategy. As a part of this strategy, it started exporting domestically manufactured vehicles to neighbouring New Zealand in 1986. In 1996, it further expanded its export reach by starting to export to Middle East countries, and in the subsequent period, began exporting to the South Pacific Islands, Malaysia and Thailand. Toyota’s export-oriented strategy provided a larger demand base, which helped Toyota, to some extent, to overcome the constraints imposed by the lower domestic demand. Exports constituted almost 70 per cent of Toyota’s total production (see Exhibit 4).Similar to other car manufacturers, Toyota Australia operated with a small scale of operation. This lack of scale at the car manufacturing stage affected even local auto component manufacturers, by keeping their costs higher. Importing cheaper inputs helped Toyota to manage the costs of components. This business model had made Toyota the most successful car brand in Australia.

 

 

 

ADVERSE EXTERNAL ENVIRONMENT

 

Toyota, along with other players in the automotive sector, operated in a growingly adverse environment.

 

Competitive Fragmented Market Structure

 

In 2013, apart from Toyota, Australia had two car manufacturers: Ford Motor Company of Australia (Ford) and General Motors Holden (Holden). Like Toyota, these manufacturers were foreign-owned subsidiaries of global companies that had affiliates in many countries. But, for Toyota, competition was not limited to these domestic manufacturers.

 

Australia’s low-tariff barriers and highly open trading environment since mid-1980s provided consumers with easy access to imported cars. Approximately 65 brands and 365 models — comprising passenger vehicles, sport utility vehicles and light commercial vehicles — competed for Australia’s total market of approximately 1.1 million new car sales per year, making the Australian automotive market both highly competitive and the most fragmented in the world.

 

 

Structural Changes and Declining Demand

 

Australia, with a population of 23.1 million, representing 0.33 per cent of total world population in 2013, represented a small market for cars. In the same year, Australia’s new vehicles’ sales accounted for just 1.3 per cent of the total global market.

 

In the aftermath of the global financial crisis, demand for automobiles in developed countries remained subdued due to slow recovery and shifted to emerging markets such as China, India and Brazil. Not only were there structural changes in the geographical distribution of demand but also changes in the composition of demand, in favour of small fuel-efficient cars,  which was counter to the types of cars manufactured by Toyota.

 

 

Small Scale of Operations, Underutilization of Capacity and Higher Cost of Manufacturing

 

Australia was also a very small player in the global automotive production sphere. It produced just more than 200,000 units of passenger and commercial vehicles, which accounted for approximately 0.25 per cent of global production. Together, the three Australian auto manufacturers produced well below the global optimal scale of operation, which was estimated to be 200,000 to 300,000 units of vehicle per year.  Toyota, the largest Australian manufacturer, with an annual installed capacity of 150,000 units produced just more than 100,000 vehicles in 2012. In the same year, Holden produced just more than 80,000 vehicle units and Ford, fewer than 40,000 units. The small scale of production kept the average cost of production of vehicles in Australia at a higher level and led to an adverse impact on the scale at which the component manufacturers operated in Australia and the cost at which they could supply the components.In addition to the lack of scale economies, the higher labour costs and other costs, such as the carbon tax and the luxury car tax, contributed to the high cost of manufacturing cars in Australia.

 

 

Government Policies and Declining Protection

 

The Australian government had been following liberal trade policies since the mid-1980s. As a part of the opening-up strategy, quantitative restrictions were phased out and were completely eliminated by 1988. At the same time, tariffs were brought down to 5 per cent by 2010. Though, to help the automotive industry to adjust to the declining tariff levels, the government provided direct assistance to the manufacturers, it was linked to investment and to research and development expenditure.  Gradually, more and more government assistance was redirected from the assembly of cars, the least competitive activity, to exports, the most competitive activity.

 

 

Free Trade Agreements and Unbalanced Trading Environment

 

To improve the trade and capital flows, Australia had signed various free trade agreements (FTAs), such as the Thailand–Australia FTA, the Association of South East Asian Nations-Australia-New Zealand FTA and the Australia-Gulf Cooperation Council (GCC) FTA. Although the FTAs were expected to result in a win-win situation for all the countries involved, the FTAs signed by Australia with countries such as Thailand, Japan and South Korea, had turned out to be bad news for the Australian car industry.  The partner countries had either retained high tariff rates on imported cars or used subtle methods to keep the imported cars out of their domestic markets. For example, although Thailand did not impose import tariffs on Australian cars, it did impose an engine-size duty that was as high as 80 per cent, which discouraged the importation of the Australian cars. Japan not only imposed a 10 per cent tariff and a 5 per cent consumer tax on imported cars but also imposed several technical specifications, which made it almost impossible to gain regulatory approval for foreign-made cars. Similarly, in South Korea, Australian cars faced a 10 per cent tariff and a clumsy registration process, which deterred exporting.

 

Adverse Currency Developments

 

Since 2001, the dramatic strengthening of the Australian dollar against the U.S. dollar (see Exhibit 6) had significantly reduced the profitability of Toyota Australia’s exports, which were primarily to the GCC countries and were committed in U.S. dollars.

 

In  a  highly  open  globalized  economy,  these  various  high-cost  and  low-demand  factors,  various government policies and other external developments affected the viability of Toyota Australia (e.g., the company reported losses of $32.6 billion in 2011/12) and compelled it to revisit its manufacturing and marketing strategies.

 

 

TOYOTA’S EFFORTS TO COUNTER ADVERSE EXTERNAL DEVELOPMENTS

 

Toyota Australia practiced the philosophy of  steady  improvement  in  productivity  and  continuous reduction in cost, as envisioned in the Toyota Production System. However, the realization of the gravity of the problem, in the event of sharp adverse developments in the external environment in the late 2011, necessitated bold steps and urgent actions, to substantially improve productivity and reduce costs, in an effort to retain Toyota’s competitiveness in the domestic and international markets.

 

 

Accordingly, to counteract the impact of adverse external developments, for the period 2012 to 2018, Toyota implemented a company-wide transformation project, referred to as the Toyota Australia Future Business Transformation. The project aimed to improve efficiency, to reduce the cost of manufacturing cars by $3,800 per car, to improve organizational and manufacturing efficiencies and to maximize sales of the domestically built Camry and Aurion models. The project adopted both internal and external cost- reduction strategies. It addressed its internal costs in early 2012, by reducing its workforce by 350 employees in the Altona plant, which had become redundant in the downturn in the aftermath of the Global Financial Crisis, the Japanese earthquake and subsequent tsunami, and the floods in Thailand. External costs were addressed by reviewing the sourcing of imported components and vehicles, and the local supplier capability development and diversification.

 

The project introduced a radical transformation to the business practices of Toyota Australia. As stated by the company’s chief executive officer (CEO), Max Yasuda, “Our business is being radically changed to counter both internal and external pressures impacting us. We are doing everything we can to strengthen Toyota Australia and ensure our long term future in this country as an importer and manufacturer.”

 

In the subsequent period, the company also tried to further reduce its labour costs by proposing a reduction in overtime payments on work done on Sundays from 2.5 times of the base hourly wage to just 2 times; eliminating allowances such as the $0.71 per hour respiratory allowance paid to paint shop workers and the “dirt money” allowance for performing work considered to be dirty or offensive; eliminating the eight-hour day for maintenance workers and including Saturday shifts as part of the normal hours of work. The company CEO Yasuda tried to justify the proposed measures by indicating that the company would be able to gain approval for further investment at the Altona plant, necessary to maintain production of the Camry model, only if production costs were slashed by $3,800 per vehicle by 2018. But, under the strong protest from the AMWU, which blocked the vote from proceeding by taking the issue to the Australia’s Federal Court, it failed to garner the required support from its workers.

 

 

 

 

EXHIBIT 1: TOYOTA AUSTRALIA’S KEY CONTRIBUTIONS

Aspect	Contribution
Total Employment	4,200 direct employees
Manufacturing Employment	2,500 manufacturing employees
Vehicles Produced (2012)	101,424 (46% of Australian vehicle production)
Vehicles Exported (2012)	74,335 (73% of production)
Vehicle Production Planned (2013)	108,000 units: This includes four cylinder petrol and hybrid engines produced for local built cars as well as engine exports to Malaysia and Thailand commencing January 2013
Government Support vis-a-vis Toyota Spending	Toyota spends at least $20 in connection with manufacturing in Australia for every $1 of government support. The spending is mainly for purchasing local parts from suppliers across Victoria, South Australia, New South Wales and Queensland. During 2013 Toyota spent $1.5 billion in connection with building cars in Australia.

 

Source: Compiled from Toyota Australia, Initial Submission to Productivity Commission Review of the Automotive Manufacturing Industry, www.pc.gov.au/   data/assets/pdf_file/0011/130124/sub031-automotive.pdf, accessed September 20, 2014.

 

EXHIBIT 2: TOP-SELLING CAR BRANDS IN AUSTRALIA, 2012–2013

 

Rank	Brand	2013	2012
1	Toyota	214,630	218,176
2	Holden	112,059	114,665
3	Mazda	103,144	103,886
4	Hyundai	97,006	91,536
5	Ford	87,236	90,408
6	Nissan	76,733	79,747
7	Mitsubishi	71,528	58,868
8	Volkswagen	54,892	54,835
9	Subaru	40,200	40,189
10	Honda	39,258	35,812

 

Source: VFACTS, Vehicle Sales, Federal Chamber of Automotive Industries, www.fcai.com.au/sales/2013-new-vehicle- market, accessed April 1, 2015.

 

 

 

EXHIBIT 3: AUTOMOBILE MANUFACTURERS’ AUSTRALIANMARKET SHARE BY BRAND (IN PER CENT), 1998–2012

Brand	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Toyota	19.6	19.5	20.2	18.3	19.2	20.5	21.1	20.5	22.2	22.5	23.6	21.4	20.7	18	19.6
Holden	19	19.7	19.7	21.4	21.6	19.3	18.6	17.7	15.2	14	12.9	12.8	12.8	12.5	10.3
Mazda	3.4	3.4	3.5	4.4	4.7	5.8	5.8	6.7	6.6	7.4	7.9	8.3	8.2	8.8	9.3
Hyundai	7.1	6	5.8	5.2	4.1	3.4	4.5	4.9	4.8	4.8	4.5	6.7	7.7	8.6	8.2
Ford	15.9	16.1	14.5	13.8	13.2	13.9	14.2	13.1	11.9	10.3	10.3	10.3	9.2	9	8.1
Nissan	5.7	6.2	5.8	5.6	6.1	6.4	6.7	5.7	5.5	5.7	5.9	5.6	6.1	6.7	7.2
Mitsubishi	10.4	8.9	9.3	8.8	8.2	8	6	5.8	5.6	6.2	6	6.1	6	6.1	5.3
Other	18.9	20.2	21.2	22.5	22.9	22.7	23.1	25.6	28.2	29.1	28.9	28.8	29.3	30.3	32
Total	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100

Source: VFACTS, Retail Sales, Key Automotive Statistics 2012, Australian Government, Department of Industry, www.industry.gov.au/industry/automotive/Statistics/Documents/KeyAutomotiveStatistics2012.pdf, accessed September 20, 2014.

 

EXHIBIT 4: AUSTRALIAN AUTOMOBILE MARKET AND TOYOTA’S STATISTICS, 2006–2012

 

		2006	2007	2008	2009	2010	2011	2012
Market	Total Market	962,521	1,049,982	1,012,164	937,328	1,035,574	1,008,437	1,112,032
	Locally Made Share of Total Market	21%	19%	17%	16%	14%	14%	13%
	Toyota Sales (incl. Lexus)	213,839	236,647	245,653	206,827	214,718	181,624	218,176
Toyota	Locally Made Domestic Sales	33,000	48,372	42,629	34,756	36,778	28,084	36,304
	Exports	80,000	97,688	101,668	63,345	82,670	59,949	74,335
	Production	111,610	148,931	141,467	96,817	119,455	93,618	101,424

 

Source: Toyota Australia, Initial Submission to Productivity Commission Review of the Automotive Manufacturing Industry, www.pc.gov.au/   data/assets/pdf_file/0011/130124/sub031-automotive.pdf, accessed September 20, 2014.

 

EXHIBIT 5: TOYOTA BUSINESS MODEL

 

 

Source: Author’s own construct based on Toyota Australia, Initial Submission to Productivity Commission Review of the Automotive Manufacturing Industry, www.pc.gov.au/   data/assets/pdf_file/0011/130124/sub031-automotive.pdf, accessed September 20, 2014.

 

EXHIBIT 6: EXCHANGE RATE MOVEMENT DURING TOYOTA AUSTRALIA’S EXPORT PROGRAM

 

 

 

 

 

 

 

 

Source:   compiled   from   Reserve   Bank   of   Australia,   “Exchange   Rates,”   Historical   Data,   Statistics,   2014, www.rba.gov.au/statistics/historical-data.html, accessed December 2, 2014.

 

 

 

Analyze the above given case study and answer the following questions

(Be specific in your answers)

 

 

 

Q1: What type of market structure is Toyota Australia operating? What are the features of this market? What challenges does this market structure pose for the company? ( 10 Marks)

 

Answer :  Perfect competition, monopolistic competition, oligopoly, and monopoly are the four forms of market structures. This industry's marketing structure is oligopolistic, which is a blend of competitive and monopolistic market structures. Oligopoly is a term used to describe an industry in which just

 

 

 

 

Q2. What factors are affecting the profitability of Toyota Australia? Which of these factors can the company control to improve profitability? What strategy would you suggest to improve the profitability? ( 10 Marks)

 

Answer : According to the current business case, Toyota Australia is faced with a decision issue following General Motors Holden's statement of its intention to depart the Australian automobile manufacturing industry, despite rising losses mostly due to unfavourable business and economic conditions. Toyota must now determine whether it wants to remain Australia's lone car maker, hoping for an uptick in the currently unfriendly economic and business conditions, or if it would be wiser to follow

 

 

 

 

Q3: Is Toyota Australia operating at the optimum scale of operation? Should Toyota expand or contract its scale of operation? What are the associated implications? (10 Marks)

 

Answer : An optimum firm is a firm that fully utilizes its scale of operations and produces optimum output with the least cost per unit production.

 

In the short-run, a firm would build the scale of the plant and operate it at a point where the average cost is at its minimum. This is

 

Q4: What should Toyota do? Should it wait for demand and cost conditions to improve, or should it exit the market? Give reasons (10 Marks)

 

 

Answer : Toyota should stay in the market. Its exit from the market would result in job losses not only for its employees in the manufacturing unit but also for the subsidiaries supported by Toyota manufacturing vehicle through the supply

 

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